The Fiscal Cliff, Explained

A primer on what you need to know about the Beltway bomb bruising Obama's honeymoon

Three years ago today, my twins were born. For the months prior to the birth, my wife and I were consumed with the pregnancy, choosing names, guessing genders and anticipating the excitement of birth.

And then those two fragile lives emerged, crying and flailing tiny limbs. Moments later, nurses handed them to us and left. A be-careful-what-you-wish-for moment set in: Wow, what do we do now?

After Nov. 6's re-election, President Barack Obama is left cradling a similar prize.

Having defeated Gov. Mitt Romney, he now owns the nation's woes for the next four years. While the current mess is nothing compared to 2009, in the coming weeks he faces one of the toughest tests of all, on a matter so toxic that both candidates appeared determined to ignore it during the campaign.

It’s a test that could be the defining throwdown of post-election 2012, and will set the tone on Capitol Hill for Obama's second term.

Already, things don't look good. Wall Street, for one, is not convinced that this baby will be low maintenance. In its first post election session, U.S. markets dropped at the opening bell, closing down about 2 percent.

So what is this fiscal cliff and why should you care? Here's a GlobalPost primer.

Fiscal Cliff, WTF?

Coined by Fed Chairman Ben Bernanke, “fiscal cliff” refers to a series of draconian tax increases and spending cuts scheduled to take effect at the start of 2013, unless Congress and the White House can agree on a better way to address Washington, D.C.’s chronic deficit spending problem—which every year is adding a bit more than $1 trillion to the U.S. debt.

The fiscal cliff was never really intended to take effect. Rather, lawmakers agreed to the measures in 2011 during a moment of political gridlock, essentially as a way to blackmail themselves into coming up with a better agreement in the future.

In a related matter with highly volatile political implications, the U.S. is reaching its $16.4 trillion debt ceiling, and Congress will need to once again extend that borrowing limit before spring 2013. The last time Congress attempted this, the negotiations quickly deteriorated, with Republican House Speaker John Boehner largely losing control to the Tea Party right. The resulting political hissy fit nearly spooked investors—aka, the people we borrow from to fund our military and social programs. And it ultimately prompted Standard & Poor’s to downgrade the U.S. government’s credit rating.

Why Should I Care?

For starters, the fiscal cliff matters to your wallet. The average American worker would be hit by a payroll tax increase of more than $2,000 in 2013.

More broadly, the measure would slash $175 billion in government spending and raise taxes by $530 billion. That, in turn, would cause the economy to shrink by an estimated 4 to 5 percent from its current growth rate, throwing the United States back into a severe recession. Many would lose their jobs at a time when the unemployment rate is already high.

What are the Prospects for a Happy Ending?

There’s a good chance this fight could turn nasty, although there are some signs of hope. Realistically, addressing Washington, D.C.’s deficit habit will demand spending cuts as well as tax increases. (As a share of the economy, tax revenues are lower than they’ve been in many decades.)

The fiscal cliff is the culmination of years of partisan bickering over taxes and the role of government. On the day after election day, Democratic Senate Majority Leader Harry Reid held a press conference seeking common ground with Republicans. A few hours later, House Speaker Boehner held a conference call to rally Republicans over the matter, and issued a statement that hinted at a “willing[ness] to accept some additional revenues, via tax reform.”

But Republicans, who control the House and hold enough seats in the Senate to block Democratic initiatives, don’t have much room to negotiate. Nearly every Republican in Congress has signed a pledge with the powerful Americans for Tax Reform not to support tax increases.

In years past, Republicans saw gridlock to be politically expedient, under the assumption that Americans sent the 2010 Tea Party contingent to the House of Representatives largely to “stop Obama.” The fact that Republicans failed to win the White House and lost some ground in the House and Senate may make them reconsider this strategy, however. As for the president, Obama has taken a beating for not embracing the deficit reduction plan put forward by the Simpson-Bowles commission, a commission he set up to come up with a smart solution to the debt imbroglio, so he may be more flexible this time around.

The uncertainty surrounding the fiscal cliff is already crimping the economy, according to companies like UPS and Morgan Stanley, so the quest to appear as job creators before the 2014 mid-term elections may help spur compromise.

The bottom line: Despite overwhelming public discontent with Beltway politics, on Election Day 2012 the American people sent virtually the same people back to Washington, D.C.

That means we’re counting on the same dysfunctional couple to save this baby from toppling off the fiscal cliff and into economic abyss.